[Federal Register: November 7, 2002 (Volume 67, Number 216)]
[Proposed Rules]
[Page 67905-67947]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no02-20]
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Part II
Department of Agriculture
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Agriculture Marketing Service
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7 CFR Parts 1000, et al.
Milk in the Northeast and Other Marketing Areas; Decision on Proposed
Amendments to Tentative Marketing Agreement and to Order; Proposed Rule
[[Page 67906]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124,
1126,1131, and 1135
[Docket No. AO-14-A69, et al.: DA-00-03]
Milk in the Northeast and Other Marketing Areas; Decision on
Proposed Amendments to Tentative Marketing Agreement and To Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule; Final Decision.
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7 CFR part Marketing area AO Nos.
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1001.......................... Northeast........................................ AO-14-A69.
1005.......................... Appalachian...................................... AO-388-A11.
1006.......................... Florida.......................................... AO-356-A34.
1007.......................... Southeast........................................ AO-366-A40.
1030.......................... Upper Midwest.................................... AO-361-A34.
1032.......................... Central.......................................... AO-313-A43.
1033.......................... Mideast.......................................... AO-166-A67.
1124.......................... Pacific Northwest................................ AO-368-A27.
1126.......................... Southwest........................................ AO-231-A65.
1131.......................... Arizona-Las Vegas................................ AO-271-A35.
1135.......................... Western.......................................... AO-380-A17.
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SUMMARY: This decision adopts revised product-price formulas for
establishing Class III and Class IV milk prices. The formulas are
applicable to all Federal milk marketing orders. The orders amended by
this decision require producer approval. Referenda will be conducted in
two markets, and dairy farmer cooperatives will be polled in the other
nine markets to determine whether dairy farmers approve the issuance of
the orders as amended.
This final decision differs from the recommended decision by
modifying the Class III and IV formulas to include farm-to-plant
component losses. Modifications are adopted to the butterfat price
formula, the protein price formula, the other solids price formula, and
the nonfat milk solids price formula. Additionally, this decision
converts the Class III and IV formula divisors to multipliers in order
to simplify and promote consistency with all end-product pricing
formulas.
FOR FURTHER INFORMATION CONTACT: Clifford M. Carman, Associate Deputy
Administrator, USDA/AMS/Dairy Programs, Order Formulation and
Enforcement Branch, Stop 0231, Room 2968, South Building, 1400
Independence Avenue, Washington, DC 20250-0231, (202) 720-6274, e-mail
address clifford.carman@usda.gov.
SUPPLEMENTARY INFORMATION: This administrative action is governed by
the provisions of Sections 556 and 557 of Title 5 of the United States
Code and therefore is excluded from the requirements of Executive Order
12866.
These proposed amendments have been reviewed under Executive Order
12988, Civil Justice Reform. This rule is not intended to have a
retroactive effect. If adopted, this proposed rule will not preempt any
state or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the Department
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, the Department will rule on the
petition. The Act provides that the district court of the United States
in any district in which the handler is an inhabitant, or has its
principal place of business, has jurisdiction in equity to review the
Department's ruling on the petition, provided a bill in equity is filed
not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility Analysis
This final decision responds to a Congressional mandate to
reconsider the Class III and Class IV pricing formulas included in the
final rule for the consolidation and reform of Federal milk orders. The
mandate was included in the Consolidated Appropriations Act, 2000 (Pub.
L. 106-113, 115 Stat. 1501).
In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C.
601 et seq.), the Agricultural Marketing Service (AMS) has considered
the economic impact of this action on small entities and has prepared
this regulatory flexibility analysis. When preparing such analysis an
agency shall address: The reasons, objectives, and legal basis for the
anticipated proposed rule; the kind and number of small entities which
would be affected; the projected recordkeeping, reporting, and other
requirements; and federal rules which may duplicate, overlap, or
conflict with the proposed rule. Finally, any significant alternatives
to the proposal should be addressed. This regulatory flexibility
analysis considers these points and the impact of this proposed
regulation on small entities. The legal basis for this action is
discussed in the preceding section.
The RFA seeks to ensure that, within the statutory authority of a
program, the regulatory and informational
[[Page 67907]]
requirements are tailored to the size and nature of small businesses.
For the purpose of the RFA, a dairy farm is considered a ``small
business'' if it has an annual gross revenue of less than $750,000, and
a dairy products manufacturer is a ``small business'' if it has fewer
than 500 employees. For the purposes of determining which dairy farms
are ``small businesses,'' the $750,000 per year criterion was used to
establish a production guideline of 500,000 pounds per month. Although
this guideline does not factor in additional monies that may be
received by dairy producers, it should be an inclusive standard for
most ``small'' dairy farmers. For purposes of determining a handler's
size, if the plant is part of a larger company operating multiple
plants that collectively exceed the 500-employee limit, the plant will
be considered a large business even if the local plant has fewer than
500 employees.
USDA has identified as small businesses approximately 62,240 of the
65,464 dairy producers (farmers) that have their milk pooled under a
Federal order. Thus, small businesses constitute approximately 95
percent of the dairy farmers in the United States. On the processing
side, there are approximately 1,621 plants associated with Federal
orders, and of these plants, approximately 928 qualify as ``small
businesses,'' constituting about 57 percent of the total.
During January 2002, there were approximately 410 fully regulated
handlers (of which 148 were small businesses), 75 partially regulated
handlers (of which 39 were small businesses), and 46 producer-handlers
(of which 24 were considered small businesses) for the purpose of this
regulatory flexibility analysis. In addition, there were ninety-three
exempt handlers with Class I sales of less than 150,000 pounds during
the month.
Producer deliveries of milk used in Class I products (mainly fluid
milk products) totaled 4.085 billion pounds in January 2002,
representing 37.7 percent of total Federal order producer deliveries.
The volume of milk pooled under Federal orders represents 76 percent of
all milk marketed in the U.S. and is estimated at 78 percent of the
milk of bottling quality (Grade A) sold in the country. More than 200
million Americans reside in Federal order marketing areas, representing
approximately 81 percent of the total U.S. population (2001).
In order to accomplish the goal of imposing no additional
regulatory burdens on the industry, a review of the current reporting
requirements was completed pursuant to the Paperwork Reduction Act of
1995 (44 U.S.C. Chapter 35). In light of this review, it was determined
that these proposed amendments would have no impact on reporting,
recordkeeping, or other compliance requirements because these would
remain identical to the current Federal order program. No new forms
have been proposed, and no additional reporting would be necessary.
This proposed rule does not require additional information
collection that requires clearance by the OMB beyond the currently
approved information collection. The primary sources of data used to
complete the forms are routinely used in most business transactions.
The forms require only a minimal amount of information which can be
supplied without data processing equipment or a trained statistical
staff. Thus, the information collection and reporting burden is
relatively small. Requiring the same reports for all handlers does not
significantly disadvantage any handler that is smaller than the
industry average.
No other burdens are expected to fall upon the dairy industry as a
result of overlapping Federal rules. This proposed rulemaking does not
duplicate, overlap or conflict with any existing Federal rules.
Consideration of Impacts on Small Businesses
To ensure that small businesses are not unduly or
disproportionately burdened based on these proposed amendments,
consideration was given to mitigating negative impacts.
A comment filed in regard to the tentative final decision by the
managing partner of a large dairy farm argued that dairy producers
selling less than 326,000 pounds of milk per month may comprise the
majority of dairy farms, but not the majority of milk sold. The comment
further stated that it is not appropriate to identify one sector and
imply that they are most in need of protection and preservation.
Under the Regulatory Flexibility Act, the definition of a ``small''
dairy farm has been redefined from a business having an annual gross
revenue of less than $500,000 to a business having an annual gross
revenue of less than $750,000. Therefore, the production guideline of
326,000 pounds per month has been increased to 500,000 pounds per month
in identifying ``small'' dairy farms.
The production guideline of 500,000 pounds per month in identifying
``small'' dairy farms is an attempt to relate a measure of size for
which data is available (pounds of production per farm) with the
criteria specified by the Small Business Administration (revenue from
sales), for which data is not readily available to USDA on an
individual farm basis. The Regulatory Flexibility Analysis does not
represent an attempt to create special privileges for farms defined as
small, but to examine the regulations to assure that they do not create
a disproportionate burden or competitive disadvantage for such farms.
As was stated in the RFA in the recommended decision, one of the
principal issues considered at the hearing was the source of price data
that should be used to generate prices for milk components and,
thereby, prices to be paid to producers. The options considered were
the National Agricultural Statistics Service (NASS) surveys of selling
prices of manufactured dairy products, Chicago Mercantile Exchange
(CME) prices, and producer costs of production. The recommended
decision selected the NASS-reported prices as the most appropriate for
use in determining product prices because of the considerably larger
volume of product represented in those price series than in the CME
price data. Producer cost of production was not included in the
calculation of prices because assuring dairy farmers that their costs
of production will be covered addresses only the milk supply side of
the market and ignores factors underlying demand or changes in demand
for milk and milk products.
Various proposals to reduce or increase the levels of the
manufacturing (make) allowances of butter, nonfat dry milk, cheddar
cheese and dry whey were considered. The present method adjusted these
make allowances from the levels adopted under Federal order reform on
the basis of data and testimony contained in the hearing record. Most
of the adjustments are minimal. Primarily, manufacturing cost surveys
performed by USDA's Rural Cooperative Business Service (RBCS) and the
California Department of Food and Agriculture (CDFA) were used to
determine the most appropriate levels of make allowance for the
products used in calculating Federal order class prices.
The only other actual collection of manufacturing cost data for
cheddar cheese and dry whey that was cited in the hearing record was a
survey of cheddar cheese and dry whey manufacturing costs arranged for
by the National Cheese Institute (NCI). This survey was conducted by
persons unfamiliar with the dairy industry among cheese processors who
did not
[[Page 67908]]
testify about the data that they submitted for the survey and was
entered into the hearing record by a witness who had no firsthand
knowledge of the data included. As a result, the NCI survey should be
relied upon to a lesser degree than the two studies used to determine
the cheddar cheese make allowance. In the case of the RBCS study, the
person who gathered the data testified about its collection and what it
represented. In the case of the CDFA-collected data, a manual detailing
the method by which the data was collected and presented was made
available, and several witnesses familiar with the survey testified
about it.
In addition, one nonfat dry milk manufacturer testified to costs of
manufacture that exceeded those of the two studies by a significant
amount, mostly in the areas of return on investment and marketing
costs. The data did not include any information about the pounds of
product manufactured and could not have been weighted with the data
from the two other studies.
Several proposals to change the factor reflecting the yield of
nonfat dry milk from nonfat solids in milk would have increased the
nonfat solids price and the Class IV skim price, but ignored the need
to reflect the generally lower price and higher manufacturing cost of
buttermilk powder that also must be considered in calculating the Class
IV nonfat solids price. Testimony and data in the record were used to
determine a factor more representative of nonfat dry milk yield and the
effect of buttermilk powder price and cost. The alternatives to the
formula adopted either did not include consideration of the price,
cost, and volume of buttermilk powder relative to those of nonfat dry
milk or gave those factors too great an influence.
Proposals were made to reduce the butter and cheese product prices
used in calculating the butterfat price and the Class III component
prices. The record of this proceeding continues to support the use of
the product prices adopted in the final rule in the Federal milk order
reform process as representing accurately the values of these products.
In the case of adjusting the Grade AA butter price to reflect the value
of Grade A butter, the record fails to reveal any source of information
for obtaining current prices for Grade A butter. In the case of
proposals to remove the 3-cent adjustment between the barrel and 40-
pound block cheese prices, there was no testimony about the actual
difference in cost between the two types of packaging that overcame
testimony that 3 cents is the actual cost difference, or any data that
indicates that the customary price difference is not at least 3 cents.
Proposals to reconsider the class price relationships in the orders
were considered, although a proposal to use a weighted average of the
Class III and Class IV prices as a Class I price mover was not noticed
for hearing in this proceeding. The hearing record supports the
continued relationships between the Class IV and Class II prices and
between the higher of the manufacturing class prices and the Class I
price.
A proposal that the Class II differential be changed to negate any
changes in the Class IV price formula that would affect the current
price relationship between nonfat dry milk and Class II failed to
consider that the Class II-Class IV price difference adopted in Federal
order reform is based on the difference in the value of milk used to
make dry milk and the value of milk used to make Class II products.
Proposals that any increases resulting from changes to the Class
III and Class IV price formulas not be allowed to result in increases
in Class I prices did not address the rationale for the current Class I
price differentials above the manufacturing price levels for the
purpose of obtaining an adequate supply of milk for fluid (drinking)
use.
The changes to the Class III and Class IV price formulas included
in the recommended decision would have had no special impact on small
handler entities. All handlers manufacturing dairy products from milk
classified as Class III or Class IV would remain subject to the same
minimum prices regardless of the size of their operations. Such
handlers would also be subject to the same minimum prices to be paid to
producers. These features of minimum pricing are required by the
Agricultural Marketing Agreement Act and should not raise barriers to
the ability of small handlers to compete in the marketplace. It is
similarly expected that small producers would not experience any
particular disadvantage to larger producers as a result of any of the
proposed amendments.
An analysis was performed on the effects of the alternatives
selected and is summarized below.
Final Decision Analysis
In order to assess the impact of changes in Federal order milk
pricing formulas, the Department conducted an economic analysis. While
the primary purpose of this decision is to amend the product pricing
formulas used to price milk regulated under Federal milk marketing
orders and classified as either Class III or Class IV milk, these
product price formulas also affect the prices of regulated milk
classified as Class I and Class II.
The modifications in this decision are analyzed simultaneously as a
change from the set of Court-ordered formulas as implemented in January
2001. This analysis focuses on impacts on milk marketed under Federal
milk marketing orders. Milk marketed in California, milk marketed under
other state regulations, and unregulated milk are treated separately.
Scope of Analysis
Impacts are measured as changes from the model baseline as adapted
from the USDA baseline developed in June 2002 for the mid-session
budget review. The baseline projections are a Departmental consensus on
a long-run scenario for the agricultural sector. Included is a
national, annual projection of the supply-demand-price situation for
milk. The mid-term review reflects the provisions of the Farm Security
and Rural Investment Act of 2002. Baseline assumptions for dairy are:
(1) The price support program will extend through December 31, 2007,
supporting the price of milk (3.67 percent butterfat) at $9.90; (2) the
Dairy Export Incentive Program will continue to be utilized; (3) the
Federal Milk Marketing Order Program will continue as reformed on
January 1, 2000, as modified by the Select, et al. vs. Veneman decision
in January 2001, and (4) the National Dairy Market Loss Program will
make payments to dairy farmers when the Class I price in Boston is less
than $16.94 per cwt.
In the model the U.S. is divided into 14 milk marketing regions, 11
that generally correspond to the Federal order areas, California, other
West, and Alaska-Hawaii. The 11 Federal orders share of the U.S. milk
marketings is about 70 percent. About 83 percent of all fluid milk and
about 65 percent of all manufactured milk is marketed under Federal
order regulations. Given the prominence of Federal order marketings,
prices paid for both fluid and manufactured milk outside of the order
system are generally aligned with prices paid in the Federal order
system. California stands out as the state with the highest production
and has its own set of comprehensive market regulations similar to the
Federal order system. California milk marketings are estimated as a
function of the California pool price. Milk marketed through the
Federal order system is the predominant subset of milk marketings in
the United States. Fluid grade milk prices for the 11 Federal order
regions are estimated as functions of Federal order minimum prices and
dairy product prices. The regional all-milk prices, which are used
[[Page 67909]]
in the regional milk supply responses, are in turn estimated from the
regional fluid grade milk price and the national dairy product prices.
Demands for fluid milk and manufactured dairy products are
functions of per capita consumption and population. Per capita
consumption for the major milk and dairy products are estimated as
functions of own prices, substitute prices, and income. Retail and
wholesale margins are assumed unchanged from the baseline. The regional
demands for fluid milk and soft manufactured products are satisfied
first by the eligible supply of milk. The milk supply for manufacturing
hard products is the volume of milk marketings remaining after
satisfying the volumes demanded for fluid and soft manufactured
products. Milk is manufactured into cheese or butter/nonfat dry milk
according to returns to manufacturing in each class. Wholesale prices
for cheese, butter, nonfat dry milk, and dry whey reflect national
supply and demand for these products. These prices underlie the Federal
order pricing system.
Summary of Results
The impacts of the changes to the Class III and Class IV formulas
that are adopted in this decision are summarized using annualized five-
year, 2003-2007, average changes from the model baseline. The results
presented for the Federal order system are in the context of the larger
U.S. market. In particular, the Federal order price formulas use
national manufactured dairy product prices.
The formula changes increase the protein prices and reduce the
prices for butterfat and nonfat solids. The results are higher Class
III prices, lower Class IV and Class II prices, and lower Class I
prices. The advanced Class I base price is the higher of the Class III
or Class IV advance pricing factors. The Class I base price is the
Class IV price in all years of the analytical period for the baseline,
while Class III becomes the Class I base price in 2003 through 2005
under this decision. The Class I price falls in 2003, 2006 and 2007.
The resulting increases in Class I and Class II demand for nonfat and
fat solids, sufficiently absorbs production increases to very slightly
increase cheese and butter prices and only slightly decrease nonfat dry
milk prices.
Producers. Over the five-year period, the Federal order minimum
Class price for milk at test increases about $0.06 per hundredweight.
The average fluid grade price for Federal order regions, which includes
premiums, increases by about $0.03 per hundredweight. Federal order
marketings increase by an average 58 million pounds annually due to the
production increase in response to higher producer prices. Federal
order milk cash receipts increase by an average $47.2 million annually
(0.28 percent) from baseline receipts of $16,729 million.
The distribution of the 2003-2007 annual average changes in the
Federal order minimum blend prices across the 11 orders range from (-
)$0.05 to (+)$0.08 per hundredweight, reflecting declines in premiums
associated with Class III milk. Estimates of annual average price and
quantity changes by order are provided in the economic analysis for
this decision.
The five-year annual average U.S. all-milk price increases by $0.03
per hundredweight over the baseline. U.S. milk marketings increase by
an average 73 million pounds annually (0.04 percent), yielding an
average cash receipts increase of $67.2 million annually (0.29 percent)
from average baseline receipts of $23,535 million.
Milk Manufacturers and Processors. Annual Class IV and Class II
skim milk prices decline each year for an average of $0.07 per
hundredweight (1.0 percent) for the 2003-2007 period. This decline
results from changing the conversion factor for nonfat dry milk to
nonfat solids from 1.0 to 0.99. The minimum butterfat prices decline
from baseline levels by an average of 2.1 cents per pound. This decline
is the result of recognizing farm-to-plant losses of milk which reduce
the yield factor from the equivalent of 1.22 pounds of butter per pound
of butterfat to 1.20. The Class IV price at test (about 8.45 percent
butterfat) declines by an average of $0.26 per hundredweight, and the
Class II price at test (7.92 percent butterfat) declines by an average
$0.23 per hundredweight over 2003-2007.
The annual average Class III price increase at test (3.52 percent
butterfat) is about $0.23 over baseline (1.9 percent), increasing
steadily from $0.15 in 2003 to $0.34 in 2007. The increase is the
result of the protein price increase of $0.14 per pound, ranging from
$0.10 to $0.18 per pound. The increase in the protein price is the
result of reducing the impact of the butterfat price on the protein
price. The butterfat price effect is reduced by multiplying the
butterfat price by 0.90, reflecting a 90 percent butterfat retention
rate in the cheese, and replacing the 1.28 factor with 1.17 reflecting
the butterfat to protein ratio of milk standardized at 3.5 percent
butterfat and 2.99 percent protein.
The Class I base price shifts from the Class IV to the Class III
price in 2003-05. The Class I skim milk price increases over baseline
levels on average by nearly $0.04 cents per hundredweight, ranging from
increases of about 18 cents in 2004-05 to declines of about 7 cents in
2006-07. The Class I price at test (about 2 percent butterfat) declines
by an average $0.01 per hundredweight from the baseline, and is similar
to the skim milk price change pattern, ranging from 13-cent increases
to 12-cent declines.
Consumers. The expected $0.01 per hundredweight decrease in the
minimum Class I price for 2003-2007 results in an average $0.001
decrease in the price per gallon of fluid milk for consumers. Annual
consumer costs for fluid milk over 2003-2007 are estimated to decrease
on average by about $3.25 million in the Federal order system and by
$4.1 million in the U.S.
The price for manufactured dairy products are estimated to increase
over baseline by an average $0.004 per pound for butter and $0.001 per
pound of cheese. Average annual consumer expenditures over the five-
year period are estimated to increase over baseline levels by $5.6
million on butter, and by $4.1 million on American cheese.
A complete Economic Analysis for the Final Decision on Class III
and Class IV Price Formulas is available upon request from Howard
McDowell, Senior Economist, USDA/AMS/Dairy Programs, Office of the
Chief Economist, Room 2753, South Building, U.S. Department of
Agriculture, Washington, DC 20250, (202) 720-7091, e-mail address
howard.mcdowell@usda.gov.
Civil Rights Impact Statement
This final decision is based on the record of a public hearing held
May 8-12, 2000, in Alexandria, Virginia, in response to a mandate from
Congress included in the Consolidated Appropriations Act, 2000, that
required the Secretary of Agriculture to conduct a formal rulemaking
proceeding to reconsider the Class III and Class IV milk pricing
formulas included in the final rule for the consolidation and reform of
Federal milk orders. The consolidated orders were implemented on
January 1, 2000. A tentative final decision on the issues considered at
the hearing was issued November 29, 2000 (65 FR 76832), and an interim
final order (65 FR 82832) became effective January 1, 2001. A
preliminary injunction enjoining portions of the interim final order
was granted in the U.S. District Court for the District of Columbia on
January 31, 2001.
Pursuant to Departmental Regulation (DR) 4300-4, a comprehensive
Civil Rights Impact Analysis (CRIA) was
[[Page 67910]]
conducted and published with the final decision on Federal milk order
consolidation and reform. That CRIA included descriptions of (1) the
purpose of performing a CRIA; (2) the civil rights policy of the U.S.
Department of Agriculture; and (3) basics of the Federal milk marketing
order program to provide background information. Also included in that
CRIA was a detailed presentation of the characteristics of the dairy
producer and general populations located within the former and current
marketing areas.
The conclusion of that analysis disclosed no potential for
affecting dairy farmers in protected groups differently than the
general population of dairy farmers. All producers, regardless of race,
national origin, or disability, who choose to deliver milk to handlers
regulated under a Federal order will receive the minimum blend price.
Federal orders provide the same assurance for all producers, without
regard to sex, race, origin, or disability. The value of all milk
delivered to handlers competing for sales within a defined marketing
area is divided equally among all producers delivering milk to those
handlers.
The issues addressed at the May 2000 hearing are issues that were
addressed as part of Federal milk order consolidation and reform.
Establishing representative make allowances in the formulas that price
milk used in Class III and Class IV dairy products is an issue that
affects the obligations of handlers of those products to the Federal
milk order pool, and similarly the pool obligations of Class I and
Class II handlers. The decision should result in no differential
benefits in dividing the pool among all producers delivering milk to
those regulated handlers. Therefore, USDA sees no potential for
affecting dairy farmers in protected groups differently than the
general population of dairy farmers.
Decisions on proposals to amend Federal milk marketing orders must
be based on testimony and evidence presented on the record of the
proceeding. The hearing notice in this proceeding invited interested
persons to address any possible civil rights impact of the proposals
being considered in testimony at the hearing. No such testimony was
received.
Copies of the Civil Rights Impact Analysis done for the final
decision on Federal milk order consolidation and reform can be obtained
from AMS Dairy Programs at (202) 720-4392; any Milk Market
Administrator office; or via the Internet at: http://www.ams.usda.gov/
dairy/.
Prior documents in this proceeding:
Notice of Hearing: Issued April 6, 2000; published April 14, 2000
(65 FR 20094).
Tentative Final Decision: Issued November 29, 2000; published
December 7, 2000 (65 FR 76832).
Interim Final Rule: Issued December 21, 2000; published December
28, 2000 (65 FR 82832).
Recommended Decision: Issued October 19, 2001; published October
25, 2001 (66 FR 54064).
Extension of Time: Issued November 26, 2001; published November 29,
2001 (66 FR 59546).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
final decision with respect to proposed amendments to the tentative
marketing agreements and orders regulating the handling of milk in the
Northeast and other marketing areas. This notice is issued pursuant to
the provisions of the Agricultural Marketing Agreement Act of 1937, as
amended (7 U.S.C. 601 et seq.), and the applicable rules of practice
and procedure governing the formulation of marketing agreements and
marketing orders (7 CFR part 900).
The Hearing Notice specifically invited interested persons to
present evidence concerning the probable regulatory and informational
impact of the proposals on small businesses. To the extent that this
issue was raised, it is considered in the following findings and
conclusions.
This final decision responds to a Congressional mandate to
reconsider the Class III and Class IV pricing formulas included in the
final rule for the consolidation and reform of Federal milk orders. The
mandate was included in the Consolidated Appropriations Act, 2000 (Pub.
L. 106-113, 115 Stat. 1501). The findings and conclusions set forth
below are based on the record of a public hearing to consider proposals
submitted by the industry to change the pricing formulas in the
marketing agreements and the orders regulating the handling of milk in
the Northeast and ten other marketing areas held in Alexandria,
Virginia, on May 8-12, 2000. Notice of such hearing was issued on April
6, 2000, and published on April 14, 2000 (65 FR 20094).
The recommended decision responded to comments received on the
tentative final decision (issued November 29, 2000; 65 FR 76832) on the
above hearing and was consistent with the injunction issued by the U.S.
District Court for the District of Columbia on January 31, 2001. This
final decision responds to comments received on the recommended
decision (issued October 19, 2001; 66 FR 54064).
Material Issues to Class III and IV Formulas
As instructed by the legislation requiring this proceeding, the
Class III and IV pricing formulas and all of the elements of the
formulas were re-considered in developing the tentative final decision,
the recommended decision, and this final decision.
The material issues on the record of the hearing relate to:
1. Role of producer costs of production.
2. Commodity prices (CME vs. NASS).
3. Commodity and component price issues.
a. General approaches on make allowances.
b. Class IV butterfat and nonfat solids prices.
c. Class III butterfat, protein, and other nonfat solids prices.
d. Effects of changes to Class III and Class IV price formulas.
4. Class price relationships.
5. Class I price mover.
6. Miscellaneous and conforming changes.
a. Advance Class I butterfat price.
b. Classification.
c. Distribution of butterfat value to producers.
d. Inclusion of Class I other source butterfat in producer
butterfat price computation.
7. Reopening of hearing or issuance of a final decision.
Summary of Changes to the Interim Amendments
The recommended decision differed from the tentative final decision
in several respects and included summaries of comments submitted on
each of the issues within the discussion of the issue. The key changes
that were made to the interim order amendments in the recommended
decision were as follows:
1. In Issue 3c, changes were made to the formulas for calculating
the protein and other solids prices, and the Class III butterfat price
would be the same as that calculated for Class IV on the basis of
butter.
2. In Issue 3d, the changes made in the Class III component price
formulas would result in different effects on Class III component,
skim, and hundredweight prices.
3. In Issue 6b, the classification of frozen cream, plastic cream
and anhydrous milkfat would be changed back to Class III.
4. In Issue 6c, butterfat values would be pooled for the purpose of
calculating
[[Page 67911]]
producer butterfat prices in the orders in which producers are not paid
on a component basis. In orders under which producers are paid on a
multiple component basis, however, the producer butterfat price would
be the same as that for butterfat used in Classes III and IV.
5. In Issue 6d, the butterfat in other source milk used in Class I
is included in calculating the producer butterfat price in marketwide
pools that do not use multiple component pricing, but would continue to
be included in the producer price differential calculation in multiple
component pricing pools.
6. Issue 7 was changed to explain the reasons for issuing a
recommended decision at this point in this proceeding, instead of a
final decision.
Summary of Changes to the Recommended Decision by This Final Decision
The changes to the recommended decision formulas by this final
decision are primarily the result of incorporating a farm-to-plant
product loss:
1. In issue 3a, an adjustment to the component price formula yield
factors to account for farm-to-plant component losses is added.
2. In issue 3b, changes are made to the yield factor used for
computing both the nonfat solids price and the Class III and Class IV
butterfat price to reflect farm-to-plant component losses. In addition,
the yield factor used for computing the nonfat solids price and the
butterfat price is converted from a divisor to a multiplier.
3. In issue 3c, the yield factors used to compute the protein price
are adjusted to account for farm-to-plant component losses and to
reflect a reevaluation of the quantity of casein retained in the cheese
making process. The other solids yield factor is adjusted to account
for farm-to-plant component losses. In addition, the yield factor used
for computing the other solids price is converted from a divisor to a
multiplier.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. Role of Producer Cost of Production
Proposal 29 in the hearing notice proposed that producers' costs of
production be incorporated into the Class III and Class IV pricing
formulas. A number of dairy farmer witnesses testified that, just as
manufacturing processors are assured that their costs of processing
milk products will be covered, dairy farmers should also have some
assurance that they will be able to continue to operate their dairy
farms without losing money. Under the current system, according to the
National Farmers Union (NFU) witness, incorporating a make allowance
for processors but not for producers leaves dairy farmers to bear the
entire burden of changes in supply and demand.
Support for using cost of production in the Class III and IV
pricing formulas was reiterated in the comments received in response to
the tentative final decision issued November 29, 2000, and the
recommended decision of October 25, 2001. The NFU comments expressed
disappointment that no portions of the milk pricing formulas were based
on producer cost of production. The American Raw Milk Producers Pricing
Association suggested that the USDA ignored existing law as written in
the 1937 Agricultural Agreement Act, section 608c(18). Two dairy
farmers also mentioned their concern about the need to follow 608c(18).
Another dairy farmer advocated a producer-influenced supply control/
price control system.
Comments filed by the Maine Dairy Industry Association (MDIA) in
response to the recommended decision joined in supporting cost of
production as a part of the pricing formulas. They expressed the
opinion that cost of production should be included because their
producers' costs are higher than the price received. The MDIA also
voiced the unfairness of processors' being assured some ability to
offset their costs through product make allowances while producers are
not able to receive such adjustment. Comments received from Schreiber
Foods indicated agreement with the recommended decision to not use the
cost of production in setting Class prices.
As explained in both the proposed rule and final decision under
Federal order reform and in the tentative final decision and the
recommended decision in this proceeding, assuring producers that their
costs of production will be covered addresses only the milk supply side
of the market and ignores factors underlying demand or changes in
demand for milk and milk products. As noted by the Dairy Farmers of
America (DFA) witness, although pricing proposals incorporating cost of
production have been noticed and reviewed several times in the last
decade without success, if a sound mechanical concept could be advanced
that overcomes the objections relative to supply and demand, it should
be considered.
The proposals by NFU and National Farmers Organization (NFO) that
advocated adoption of make allowances that would be adjusted for
changes in indexes reflecting dairy farmers' production costs are
discussed under Issue 3a, General Approaches on Make Allowances.
In this final decision, consideration has again been given to cost
of production proposals. As noted by the NFO witness, the current
pricing system uses the interaction of supply and demand for milk
products as an indirect method of meeting the pricing requirements of
the Agricultural Marketing Agreement Act of 1937 (the Act) for milk.
According to the recommended decision, the record contained no new
dairy farmer cost of production data that could be used to reflect both
the supply and demand sides of the market for dairy products. The
recommended decision continued to state that there was no evidence in
the record that either USDA's Economic Research Service or the CDFA
costs of production had ever been used to price milk.
The Act stipulates that the price of feeds, the availability of
feeds, and other economic conditions which affect market supply and
demand for milk and its products be taken into account in the
determination of milk prices. This requirement currently is fulfilled
by the Class III and Class IV component price calculations. If
conditions increase supply costs, the quantity of milk produced would
be reduced due to lower profit margins. As the milk supply declines,
plants buying manufacturing milk would pay a higher price to maintain
an adequate supply of milk to meet their needs. As the resulting farm
profit margins increase, so should the supply of milk. Likewise, the
reverse would occur if economic conditions reduce supply costs. The
price of feed is not directly included in the determination of the
price for milk, but rather is one economic condition which may cause a
situation in which the price of milk may increase or decrease. A change
in feed prices may not necessarily result in a change in milk prices.
For instance, if the price of feed increases but the demand for cheese
declines, the milk price may not increase since milk plants would need
less milk and therefore would not bid the price up in response to lower
milk supplies. Also, other economic conditions could more than offset a
change in feed prices and thus not necessitate a change in milk prices.
The pricing system, according to the recommended decision,
accounted for changes in feed costs, feed supplies, and other economic
conditions, as explained above. The product price formulas adopted in
the recommended decision would reflect accurately the market
[[Page 67912]]
values of the products made from producer milk used in manufacturing.
As supply costs increase with a resulting decline in production,
commodity prices would increase as manufacturers secure additional milk
to meet their needs. Such increases in commodity prices would mean
higher prices for milk. The opposite would be true if supply costs were
declining. Additionally, since Federal order prices are minimum prices,
handlers may increase their pay prices in response to changing supply/
demand conditions even when Federal order prices do not increase.
Additionally, the pricing formulas contained in the recommended
decision and this final decision are applicable to handlers, since
handlers are the regulated parties under Federal milk order regulation.
The formulas are used to establish minimum prices for milk used in
making particular dairy products, not for determining payments to dairy
farmers.
2. Commodity Prices (CME vs. NASS)
As adopted in the interim final rule in this proceeding (published
on December 28, 2000 (65 FR 82832)), commodity prices determined by
surveys conducted by USDA's National Agricultural Statistics Service
(NASS) continue to be used in the component price formulas that
replaced the BFP. The recommended decision proposed no changes in the
source of product price data. Likewise, this final decision adopts no
changes in the source of product price data.
Several proposals (1, 5, 10 and 19) were considered during the
current proceeding that recommended using prices reported by the
Chicago Mercantile Exchange (CME) instead of the NASS surveys to
determine commodity prices. Both the CME and the NASS surveys were
supported by testimony at the hearing and in briefs. Several comments
to the recommended decision supported continuing to use the NASS
surveys.
The CME is a cash market where speculators, producers, and
processors can buy and sell products. It is a mechanism for
establishing prices on which the dairy industry relies. Thus, many
contracts to buy and sell dairy products are based on CME prices. A
USDA witness testified that he is unaware of any other indices used to
price cheese in the U.S. According to several witnesses, cheese and
butter processors generally base their contract sales on CME prices.
The NASS price survey gathers selling prices of cheddar cheese,
Grade AA butter, nonfat dry milk, and dry whey from a number of
manufacturers of these products nationwide. At the time the proposed
rule on Federal order reform was published (January 30, 1998), the NASS
survey included prices for cheddar cheese only. This survey began in
March 1997. In September 1998, before the final decision was published
in April 1999, NASS began surveys of Grade AA butter prices, dry whey
prices, and nonfat dry milk prices. In developing these commodity
surveys, input was obtained from the dairy industry on appropriate
types of products, packaging, and package sizes to be included for the
purpose of obtaining unbiased representative prices. A sale is
considered to occur when a transaction is completed, the product is
shipped out, or title transfer occurs. In addition, all prices are
f.o.b. the processing plant/storage center, with the processor
reporting total volume sold and total dollars received or price per
pound. NASS Dairy Product Prices reports wholesale cheddar cheese
prices for both 500-pound barrels and 40-pound blocks, USDA Grade AA
butter, USDA Extra Grade or USPH Grade A non-fortified dry milk, and
USDA Extra Grade edible non-hygroscopic dry whey. A more detailed
description of the surveys can be found in the final decision of April
2, 1999 (64 FR 16093).
The proponents of proposal 1, Western States Dairy Producers Trade
Association, et al. (WSDPTA), a group of several trade associations and
cooperatives, proposed that the NASS commodity prices for butter,
cheese, and nonfat dry milk that currently are used for computing the
Federal order component prices be replaced with prices determined by
trading on the CME. Dry whey was not included in the proposal because
there is no dry whey cash contract traded on the CME. A witness from
WSDPTA did not oppose the collection and reporting of NASS data, but
expressed the opinion that while it serves an important function as
information, it should not be used to establish prices. The proponents
presented several benefits of using the CME over the NASS survey for
commodity prices.
Proponents explained that by using CME prices in the formulas,
prices would be known immediately rather than a week later when the
NASS prices are published, reflecting more quickly the supply-demand
conditions for dairy products. The one-week delay is caused by the time
necessary to collect data. A witness for NFO noted that interested
persons are able to check the CME value of products on a daily basis
and use the reported prices as a factor in establishing what they will
pay, or what they will be paid, for cheese.
A witness from WSDPTA went on to explain that buyers, sellers, and
speculators trade the CME, trying to obtain a price in their favor,
while the price actually is determined by supply and demand forces. He
described the rules as fair and the results as transparent, with
participants having a number of interests. The witness continued by
noting that the CME price result is instant and results cannot be
altered. In contrast, he stated, NASS prices are reported by sellers
only, who are not disinterested parties. He argued that NASS
respondents can modify their numbers or file an initial report after
calculating the price impact of the latest reports.
The proponents also concluded that the urging by many hearing
participants that the NASS price series include mandatory participation
and be audited proves that the NASS series is not reliable enough to be
used as a price-discovery method.
Finally, the witness from WSDPTA expressed the view that the NASS
price series would feed on itself and result in price setting, not
price discovery. He continued by noting that plants and their buyers
will obtain prices one week and sell the commodity in the following
week at a price derived in large part from the price obtained in the
prior week. The witness compared the NASS survey to the CDFA survey of
powder prices which, he claimed, results in a circular pricing system
that is mathematically incapable of fully reflecting the top of the
market price for powder because so little of the survey volume is
priced off of the spot market. Proponents expressed the belief that
this circularity causes prices to remain lower than they would without
it and that prices would increase more slowly and decrease more rapidly
than would prices on the CME, causing overall lower prices for dairy
farmers.
In the comments filed on the tentative final decision, the
proponents of changing from NASS to CME prices commented only that USDA
should reconsider the use of NASS prices. A partner/manager of a dairy
farm stated that there is little correlation between the NASS and
wholesale prices, and questioned the accuracy of NASS survey numbers.
He also stated that block and barrel cheese is traded only between
manufacturers and that they therefore have an influence on setting the
price, especially if the percentage of the product traded is very low.
He argued that a fair price would reflect retail prices or at least
true wholesale price,
[[Page 67913]]
not the value of the last pound of product produced.
Opponents of changing from NASS to CME prices to compute component
prices included International Dairy Foods Association (IDFA), DFA, and
National Milk Producers Federation (NMPF). Witnesses for these parties
argued that the NASS survey includes pricing based on a significantly
larger volume of product than does the CME. In the case of the nonfat
dry milk market, the table of 1999 monthly CME Cash Markets data from
the 1999 Annual Dairy Market Statistics showed that there were no sales
reported for either extra grade or Grade A in the year 1999.
According to a witness from IDFA, the volume of cheddar cheese in
the NASS survey is equal to 26.4 percent of all cheddar cheese
production in the U.S. for the period September 1998 through February
2000. During the same period, the CME volume of cheddar cheese traded
represented only 1.7 percent of U.S. cheddar cheese production. The
witness stated that for the same 18-month period, the NASS survey
volumes represented 14.4 percent of all U.S. butter production while
CME trading consisted of only 2.6 percent. He also noted that switching
from the NASS survey data to the CME data would result in a change from
a very broad to an extremely thin representation of actual product
transactions.
Opponents to the proposal to use CME prices also pointed out that
prices at the CME are Chicago or Midwest prices based on the delivery
location specification of the contract. Therefore, they argued, the
scope of the reported prices for cheese, butter, and nonfat dry milk
are not national. A witness for Kraft noted that reliance on the CME
alone would exclude the substantial and growing volume of cheese
produced in the western United States (U.S.), particularly California.
A witness for Northwest Dairy Association suggested that a
transportation credit would need to be used with CME prices, at least
in the West, to reduce the value of the CME to a more representative
level. Opponents went on to explain that since the NASS survey contains
data from plants located all over the United States, NASS prices
represent a national scope of the prices of each of the particular
commodities.
Several of the comments filed in response to the tentative final
decision supported use of the NASS price series to determine product
prices. Furthermore, there were several comments filed on the
recommended decision and they all supported using NASS prices. The
Michigan Milk Producers Association (MMPA) comment noted that NASS
``provides the broadest range of price information and is
representative of the product prices realized by the dairy industry.''
In response to the recommended decision, DFA indicated that legislation
enacted subsequent to the recommended decision improved the
reliability, completeness, and integrity of the NASS price surveys. On
November 22, 2000, the Dairy Market Enhancement Act of 2000 was enacted
thereby authorizing mandatory and verifiable price reporting.
According to the testimony in the record and a number of the
briefs, cheese and butter sellers and buyers look to the CME to
identify the most current price levels. As a result, prices move in
response to supply and demand conditions in the marketplace as
reflected at the CME. Since the transaction prices of commodities are
based off of the CME, it is difficult to see how the NASS survey can
cause, or result in, circularity. The NASS prices reflect the CME
prices with a short lag but are based on a much greater volume,
enhancing the stability of the price series. Continued use of the NASS
price survey appears to be the best method of obtaining reliable data
about commodity prices.
As stated in the final decision on Federal order reform, NASS data
traditionally has been collected via a survey with voluntary
participation. The price information, like most NASS data, has not been
audited. NASS, however, applies various statistical techniques and
cross-checking with other sources to provide the most reliable
information available. The issue of mandatory and audited NASS data was
not within the scope of the rulemaking and could not be addressed on
the basis of the hearing record. At the time of the hearing NASS was
not authorized to conduct such activities. As noted above, however, the
Dairy Market Enhancement Act of 2000 authorized mandatory and
verifiable price reporting.
3. Commodity and Component Price Issues
a. General Approaches on Make Allowances
Make Allowances. Changes to the make allowances for each of the
product formulas used in calculating component prices were proposed and
discussed at length during this proceeding. Except in the case of dry
whey, make allowances adopted in the component price formulas in the
recommended decision were calculated using a weighted average of the
most recent California Department of Food and Agriculture (CDFA) study
and the Rural Business Cooperative Service (RBCS) study. A marketing
cost of $0.0015 per pound is added to both the CDFA costs and the RBCS
costs, and the CDFA value for return on investment is used to adjust
the RBCS cost. This is generally the same approach used to determine
the appropriate make allowances under Federal order reform, and results
in values that differ little from the formulas adopted at that time.
For the calculation of the Class III ``other nonfat solids'' price,
neither the CDFA nor RBCS studies included information on the cost of
making dry whey. The tentative final decision determined that the make
allowance for dry whey should remain the same as that for nonfat dry
milk. However, the results of a survey conducted for this proceeding
under the auspices of IDFA were included in the recommended decision to
determine the make allowance for dry whey.
A number of the proposals considered in this proceeding would
change the manufacturing, or make, allowances adopted for the pricing
formulas under Federal order reform. There was considerable testimony
on the appropriate factors to be considered in establishing make
allowances, and several sources of data were cited as the most accurate
to use for such a purpose.
Two surveys of product manufacturing costs that were averaged for
use in calculating make allowances under Federal order reform were the
CDFA study, which is done annually and includes nearly 100 percent of
dairy products manufactured in California, and the RBCS study, which is
conducted annually by USDA as an in-plant benchmark study for
participating cooperative associations. These two surveys had both been
updated since earlier versions had been used in determining the
manufacturing allowances used in the component pricing formulas adopted
under Federal order reform. In addition, the National Cheese Institute
(NCI), an affiliate of International Dairy Foods Association (IDFA),
contracted with a third party to conduct a survey of the costs of
manufacturing cheese and whey powder for use in this proceeding.
A witness for National Milk Producers Federation (NMPF) stated that
make allowances should reflect the costs incurred by average plants
manufacturing the particular dairy product used in the component/Class
price formulas: butter, nonfat dry milk, cheese, and dry whey. The
witness went
[[Page 67914]]
on to explain that the procedure used by the Department for determining
the make allowances under Federal order reform, using an average of the
CDFA cost of production studies and the RBCS study, was sound and that
the same procedure should be used as a result of this hearing, using
the updated data from both surveys. In calculating an appropriate make
allowance, the witness supported the addition of a marketing cost of
$0.0015 per pound to both the CDFA costs and the RBCS costs, as under
Federal order reform, and the CDFA value for return on investment used
to adjust the RBCS costs under Federal order reform. The witness
explained that both of these factors should be included as they are
legitimate and necessary costs incurred in operating manufacturing
plants. The witness for IDFA supported inclusion of the CDFA cost
studies in the computation of the make allowance; however, the witness
stated that the appropriate procedure for computing the make allowance
for cheese was to compute a weighted average of the CDFA cost studies
and the NCI survey. The witness explained that the RBCS study does not
include all the necessary costs that must be recovered in the make
allowance and that the NCI survey is needed to determine what the
additional cost values should be. The costs that the IDFA witness
pointed out--those which are not included in the RBCS survey but which
are included in the NCI survey--are general plant administrative costs,
such as the plant manager's salary and corporate overhead, return on
investment or capital costs, and marketing costs.
The IDFA representative testified that the danger inherent in
regulated prices is setting the manufacturing allowance at a level too
low to assure that manufacturers will be able to recover their costs of
manufacturing finished products and to have the money needed to invest
in new plants. The witness pointed out that an inadequate make
allowance would force manufacturers either to move to areas that do not
have regulated pricing or go out of business. At the very least, the
witness explained, the manufacturers would not invest in new plants and
equipment, which in the long run would cause a decline in the
productivity of the dairy industry. A number of briefs filed on the
basis of the hearing transcript emphasized the importance of covering
all handlers' costs of manufacturing and not just average costs.
The IDFA witness explained that if make allowances are established
at too low a level, proprietary plants are placed at a competitive
disadvantage relative to cooperative-owned plants. The witness
explained that since cooperatives do not have to pay their producers
the minimum order price, as proprietary plants are required to do,
cooperative plants can reduce the prices paid to member producers to
make up the difference in cost.
The IDFA witness explained further that the problem with a make
allowance established below the amount needed to cover plant costs
occurs because the plant sells the finished product at the same price
that is used in the formula for establishing the minimum price the
plant must pay for the raw material (milk). The manufacturing
allowances are the only place the plant has the opportunity to cover
its costs, and those allowances are fixed in the formula that
determines the raw material price.
The witness for IDFA asserted that there is very little risk in
setting a make allowance too high. He explained that if the make
allowance is established at a level above plant costs, the additional
revenue stream will be corrected through market forces by requiring the
plant operators to pay competitive over-order premiums to milk
suppliers to obtain an adequate supply of milk.
A witness for WSDPTA explained that the most important part of
determining a manufacturing allowance is to pick a method and stick
with that method. The witness testified that the appropriate method is
to use the results of the RBCS study with adjustments to include
factors for marketing costs and for capital costs. The witness pointed
out that use of the RBCS study is appropriate because the study is
voluntary and represents the costs of making the particular
commodities, and the plants are geographically widely dispersed. The
WSDPTA witness stated that including the results of the CDFA study in
the computation of the make allowance for pricing Federal order milk is
inappropriate since there is no logical reason for considering the
manufacturing costs of plants that do not procure any of the milk that
would be priced using those costs.
Witnesses testifying on behalf of NFU and NFO both supported the
concept of variable make allowances, in which changes in dairy farmer
production cost indexes would be used to adjust handler make
allowances. The NFU proposal would use an average national cost of
production, presumably as published by USDA's Economic Research
Service, and the NFO proposal would use the CDFA milk production cost
index. The witnesses supported such an approach as a means of
addressing the problem of manufacturers being insulated from changes in
supply and demand by their fixed make allowances.
The NFU and NFO witnesses explained that a fixed make allowance, as
contained in the current pricing system, does not vary with market
conditions and creates a situation in which manufacturers will not
respond to market signals since the manufacturers will receive a profit
no matter what the supply and demand is for the finished products. The
witnesses testified that as long as the make allowance allows
manufacturers a sufficient return, the manufacturers will continue to
produce the finished product even if there is limited demand for the
product, thus resulting in a continued low price paid to producers for
their milk. As a result, they argued, producers are left to bear the
burden of changes in supply and demand. The NFO witness characterized a
variable make allowance tied to the cost of producing milk as a market-
oriented system.
The NFU witness described the California milk pricing system, in
which manufacturers' production costs are covered through the make
allowance, as an example of the problems encountered by producers with
the use of product price formulas incorporating make allowances. He
testified that California continues to produce a large quantity of
lower-valued products because the pricing system makes the manufacturer
immune to the supply of and demand for the products. The witness blamed
the California make allowance system for the traditionally low milk
prices in California that, he claimed, result in expansion of dairy
herds to make up for reduced cash flow. The witness predicted that if
the Federal order system follows the same pricing path, the same
production patterns as witnessed in California would follow in the rest
of the United States.
In comments filed in response to the tentative final decision, NFU
stated that producers, as well as processors, will fail if they don't
attain their costs of production. NFU also argued in its comments that
under a variable make allowance, processors can avoid reduced make
allowances by increasing product prices.
The NFU comment overlooks the fact that the make allowances
included in the component price formulas do not cover all of the costs
of all processors, and probably allow for greater costs than are
experienced by some processors. In this sense, the margins experienced
by processors under product price formulas are variable between plants.
Also, it is likely that processors share some of their margin
[[Page 67915]]
with producers in the form of over order prices. The degree to which
this sharing occurs certainly may vary with producers' cost/price
situations, as perceived by processors. Although increased product
prices would have the effect of increasing manufacturing margins, the
ability of processors to increase prices while maintaining sales is
limited by the fact that the marketplace in which they sell their
products is competitive.
There appears to be no logical or economic reason for changing make
allowances for processing plants because of a change in the cost of
producing milk. If milk is to clear the market, plants must be willing
to accept it. Make allowances that decline as a result of increasing
milk production costs would squeeze plant margins, and manufacturers
will have to choose between not receiving milk, refusing to receive
pooled milk, or paying less than order prices to cooperative
associations for milk used in manufactured products. None of these
outcomes would be in the best long-term interests of dairy farmers,
processors, or consumers. Many dairy farmers, facing increased costs of
production, would have to find alternative outlets for their milk.
Decisions on the part of many processors to cease operating, use only
nonpool milk, or buy milk below order prices likely would result in
very disorderly conditions among dairy farmers looking for outlets for
their milk.
Most hearing participants agreed that the make allowance should
cover the cost of converting milk to a finished manufactured dairy
product. However, several participants disagreed with the IDFA
contention that there is very little risk in setting the make allowance
too high. They argued that if the make allowance is set in excess of
the cost to manufacture finished products, the additional revenue would
be kept by the manufacturing plants as higher profits and not
distributed to the producers supplying milk to the plant. They
explained that in many parts of the country there is little if any
competition for the dairy farmers' milk and therefore no incentive for
a plant to pay above the minimum Federal order price. These plants,
according to the witnesses, could be expected to keep the extra make
allowance for themselves. Comments filed by Michigan Milk Producers
Association (MMPA) on the tentative final decision and the recommended
decision continued to urge caution against logic that suggests a low
risk of setting make allowances too high. The cooperative stated that
not all of its 2,700 members might survive a market adjustment period
if make allowances were set too high, even if theoretically greater
premiums might be returned to producers.
Several witnesses opposed the idea of setting make allowances at
levels that guarantee plants a profit, or at least a return on
investment, when the dairy farmers supplying milk to the manufacturing
plants have no similar assurances for covering the costs of producing
milk. These witnesses pointed to the Agricultural Marketing Agreement
Act of 1937, sec. 608c(18), as justification for setting a lower make
allowance for plants, resulting in higher milk prices that would come
closer to covering dairy farmers' costs of producing milk.
As supported by most of the hearing participants, the make
allowances incorporated in the component price formulas under the
Federal milk orders should cover the costs of most of the processing
plants that receive milk pooled under the orders. In part, this
approach is necessary because pooled handlers must be able to compete
with processors whose milk receipts are not priced in regulated
markets. The principal reason for this approach, however, is to assure
that the market is cleared of reserve milk supplies.
In comments on the tentative final decision, IDFA continued to
argue that some legitimate manufacturing costs are excluded from the
RBCS survey and attacked the data gathered as ``inherently suspicious
and unreliable.'' IDFA also stated that the survey is not taken
seriously by some of its participants. Both IDFA and Leprino Foods
Company argued in comments on the tentative final decision that adding
factors for costs excluded in the RBCS study constitutes a less
accurate result than if those costs were included in a comprehensive
study. IDFA also commented that the need to allow for changes in cost
factors that might occur over time (such as recent increases in energy
costs) also supports the need for a make allowance that is too high
rather than one that is too low.
Several comments filed on the recommended decision indicated
opposition to establishing make allowances based on an average of plant
manufacturing costs. Agri-Mark Dairy Cooperative argued that using an
average manufacturing cost in the pricing formulas would result in half
of all handlers having higher manufacturing costs. IDFA noted in their
comments that mechanically adopting a make allowance survey ``would by
definition mean that the one-half of cheese produced in plants with
greater than average costs would be forced out of business.'' Comments
received from Northwest Dairy Association and Westfarm Foods, Inc.,
stated that USDA's use of ``a simple average risks half the industry.''
This final decision finds that continuing to use an average make
allowance of dairy manufacturing plants' costs is appropriate. Reliance
on product-price formulas necessitates the need to reflect and to
offset the manufacturing costs incurred and is supported by the record
even though there is disagreement on exactly how to accomplish this.
Using an average make allowance provides a reasonable measure to
reflect and offset manufacturing costs and is the only reasonable
measure that can be supported by the record evidence.
Although the RBCS survey does not include such costs as general
plant administrative costs, return on investment or capital costs, and
marketing costs, it is a survey that has been done for sixteen years
with the same fundamental methodology and with some continuity of
participants. Because the survey is done for the benefit of the
participating organizations (cooperatives) to help them identify their
costs and compare them with those of their peer group, there is every
reason to believe that the costs provided are as accurate as possible.
In addition, the years of experience with the survey have enabled USDA
to shape the questions to obtain more accurate results.
When the RBCS survey results are adjusted to include the factors
that were mentioned above as not included by using the values for those
factors from the CDFA survey, the two surveys' costs are comparable,
especially considering that the RBCS survey represents manufacturing
plants with a wide distribution around the U.S., while the CDFA survey
includes only California plants. The CDFA survey is also done every
year and is done according to a published procedure manual, with the
costs being audited by personnel employed by the State for that
purpose. Although no CDFA employee was available to respond to
questions about the conduct of the survey, official notice was taken of
the procedure manual and of California publications associated with
manufacturing cost data. In addition, several witnesses who are deeply
involved with the California dairy industry testified regarding the
perceived reliability of the survey results.
The use of manufacturing plant data from California plants that do
not procure any of the milk that would be priced using those costs
should not
[[Page 67916]]
cause concern. The costs of manufacturing dairy products may vary
slightly by region, but adoption of representative make allowances in
product price formulas should not fail to use a well-documented study
that includes a large amount of audited data, such as the CDFA survey.
In contrast to the RBCS and CDFA surveys, the survey of cheese and
whey powder manufacturing costs arranged for by NCI was developed
solely for the purpose of establishing costs to be used in determining
make allowances for this proceeding. The survey was conducted by
persons unfamiliar with the dairy industry among cheese processors who
would benefit from the adoption of overgenerous make allowances. No one
who actually conducted the survey was made available to testify, and
although the IDFA witness stated that survey participants would testify
regarding their responses to the survey later in the hearing, none of
the participating firms' witnesses would respond to questions about
their firms' results.
Although less weight must be given the NCI survey than either the
RBCS or the CDFA surveys for the reasons stated above, the NCI survey's
resulting manufacturing costs for cheese are not considerably different
from a weighted average of the RBCS and the CDFA surveys. In fact,
although the IDFA hearing participants went to great lengths to
discredit the RBCS study for use in identifying an appropriate level of
manufacturing costs, the hearing record reflects that the NCI survey of
cheese and dry whey manufacturing costs used the RBCS 1996 survey
results to identify outliers (plus or minus 10 percent) in the study
commissioned by NCI.
In comments filed regarding the tentative final decision, IDFA
urged that USDA use the NCI and CDFA studies for use in determining
make allowances for cheese and whey powder rather than using the RBCS
and CDFA studies. IDFA stated that the RBCS study was neutral and was
not developed or commissioned for use in this proceeding. Cooperative
associations attending the National Milk Producers Federation annual
meeting were encouraged to participate in the survey so the results
could be used in this proceeding. Since the RBCS study was developed
and has continued for sixteen years for purposes other than
establishing make allowances, and the methodology did not change from
past years for the study used in the hearing, it is unlikely that it
was designed for any purpose other than the one for which it was
developed and has been used for that period. If the comment is intended
to raise concerns that cooperative associations generally favor lower
make allowances, it should be noted that only manufacturing
cooperatives were surveyed. The record contains ample evidence that
many manufacturing cooperatives desire make allowances just as generous
as those favored by proprietary manufacturers.
A comment filed on behalf of the Association of Dairy Cooperatives
in the Northeast (ADCNE), some of which are national in scope, argued
that use of the NCI data would demean the importance of sworn first-
hand testimony that is subject to cross-examination.
As a result of the differences in conduct of the three surveys,
manufacturing costs used to determine appropriate make allowances for
cheddar cheese, butter, and nonfat dry milk in this proceeding are
calculated primarily from a weighted average of the RBCS and CDFA
surveys, with a check against the NCI survey cost of manufacturing
cheddar cheese. Since the record lacks any other data regarding the
cost of making whey powder, the NCI survey results are used for the
make allowance in the other solids formula.
One proposal included in the hearing notice would have eliminated
any marketing allowance from the make allowances, and a number of
witnesses' testimony objected to the inclusion of return on investment.
The American Farm Bureau witness questioned the need for a marketing
allowance since producers already pay a 15-cent assessment for
promotion and research. A brief filed by the proponent of eliminating
the marketing allowance stated that the allowance appears to be an
``adjustment'' or a ``hedge,'' since it is not defined in the final
decision in the Federal order reform process.
There was general agreement among those testifying that a marketing
allowance should be included in manufacturing costs, but no consensus
about the appropriate number. Some of the costs covered by the
marketing allowance include maintaining and staffing warehouses,
supporting a marketing and sales staff, and transporting product to
market, as well as accounting costs associated with the sale of
products. The NCI survey identified a marketing cost of $0.0011 per
pound of product, while the DFA witness stated that DFA's costs were
approximately $0.0018. The DFA witness testified that because the costs
included in the activities designated as marketing generally fall
within a common department under common management, it is appropriate
to apply the same allowance to each product.
A witness for Northwest Dairy Association (NDA), a cooperative
association in the Pacific Northwest, stated that NDA's marketing costs
are $0.0026 but identified costs associated with the aging of cheese as
included in that number. Since the NASS survey price does not include
cheese intended for aging, the marketing allowance certainly should not
include costs of aging cheese. The Associated Milk Producers, Inc.
(AMPI), witness used a $0.0024 marketing allowance in the calculation
of AMPI's proposed make allowance for nonfat dry milk. The witness for
Agri-Mark, Inc., a large Northeast cooperative association with several
processing plants, stated that Agri-Mark's estimates of marketing costs
ranged from $0.0025 to $0.005 per pound.
The costs identified as those included in a marketing allowance are
necessarily incurred in getting a product to market and are not related
to the consumer education and advertising activities covered by the
National Dairy Board assessment. The recommended decision stated that
since the marketing cost determined by NCI was the only estimate
included in the hearing record that was supported by a survey. It
varies from the $0.0015 rate included in Federal order reform by only 4
one-hundredths of a cent and applies only to cheese and dry whey. The
recommended decision concluded that there was no basis for making any
change to the marketing allowance.
Some producer witnesses objected to the inclusion of any allowance
for return on investment in manufacturing allowances on the basis that
dairy farmers are assured of no such return. The CDFA manufacturing
cost surveys include allowances for depreciation, which is included in
the non-labor processing costs; and for return on investment, which
represents the opportunity cost of the processors' resources invested
in the business. These costs are supported by audited data.
Both the marketing allowance and return on investment factors
should be included in the manufacturing allowances provided in the
component price formulas at the rates supported by the CDFA data. If
processors are not provided enough of a manufacturing allowance to
market the product they process, or to earn any return on investment,
they will not continue to provide processing capacity for producers'
milk. At the same time, the manufacturing allowances incorporated in
the formulas will not provide enough of an allowance to assure that
every processor, no matter how inefficient or
[[Page 67917]]
high-cost, will earn a profit. Allowances set at such a level certainly
could result in the situation warned of by producer groups in which
processors manufacture greater volumes of product than the market
demands because they are guaranteed a profit on all their production.
As a result, the only way to market all of the product would be to
reduce prices, with a profit to processors still locked in through the
make allowance, which would result in decreasing prices paid to
producers. In addition, manufacturers who are assured a profit on all
of their output would have a lesser incentive to make a sufficient
quantity of milk available for fluid use--a basic goal of the Federal
milk order program.
Farm-to-plant losses. One area addressed by several hearing
participants in testimony and in briefs as appropriate to consider in
establishing make allowances or yields was the loss of milk components
during manufacturing processes.
Two cheese manufacturers, IDFA and Land O'Lakes (LOL), continued to
argue in their comments on the tentative final decision that make
allowances should be increased, or yields reduced, to reflect shrinkage
between farms and warehouses.
The tentative final decision and the recommended decision stated
that orders have always provided an allowance for shrinkage and that
inflating costs of production or reducing yield factors to reflect
shrinkage would not properly reflect the value of producers' milk used
in manufactured products. The recommended decision also stated that
processing costs determined by surveys underlie the manufacturing costs
incorporated in the pricing formulas and were expressed in cents per
pound of end product manufactured, not in the cost per hundredweight of
converting milk to manufactured products. The recommended decision went
on to state that the component pricing formulas were based on the
content of those components in the finished products for which a
manufacturing cost per pound had been established. The recommended
decision concluded that both the CDFA and RBCS cost surveys allocated
all plant costs to actual end products and that the yield factors in
the formulas referred to the amount of finished product resulting from
the processing of a given volume of input or to the amount of component
present in the finished product.
Comments on the recommended decision from Kraft Foods, Inc.,
Leprino Foods Company, IDFA, Hilmar Cheese Company, Agri-Mark Dairy
Cooperative, Davisco Foods International, Glanbia Foods, Inc., Winger
Cheese, Inc., and Northwest Dairy Association and WestFarm Foods (NDA)
expressed concern that the Class III and IV milk pricing formulas
offered in the recommended decision do not sufficiently address the
costs incurred in the assembly, transportation, and delivery of milk
and its components. Kraft, Leprino, Hershey, Dairy Farmers of America
(DFA), and Dr. David Barbano of Cornell University testified at the
hearing as to the need to specifically account for the losses in milk
solid components that occur between moving milk from the farm or
diverting plants and the receiving manufacturing plant. The witnesses
and comments provided testimony that these losses are inherent in the
handling of milk and that this issue was inadequately addressed in the
recommended decision. This final decision finds the arguments for
specific consideration of the impact of shrinkage in the product price
formula persuasive.
The hearing testimony as well as comments to the recommended
decision provide sufficient evidence to conclude that the recommended
decision formulas do not properly consider farm-to-plant losses that
occur. Testimony indicates that these losses are 0.25 percent on all
milk solids, and that butterfat solid losses are an additional 0.015
pounds per hundredweight of milk. These losses need to be represented
in the pricing formula, according to these claimants, to account for
the out-of-plant losses that occur prior to processing raw milk into
finished products such as cheese or butter/powder.
Witnesses for Kraft, Leprino, DFA, and Hershey, among others,
testified that the difference between the quantity of milk, including
components, received at the plant should be accounted for in the price
formulas, since the formulas are based on yields attributable to
components received at the plant. Milk unrecoverable in the movement
from farm-to-plant cannot yield finished product.
Comments received from Select Milk Producers, Inc., and Continental
Dairy Products, Inc., supported the Class III and IV pricing formulas
as offered in the recommended decision, offering that including an
adjustment for farm-to-plant loss would cause confusion.
As indicated earlier, Federal orders have always contained
provisions for ``shrinkage.'' Since handlers have to account for all
receipts and utilization, the shrinkage provision allows assigning a
value to milk losses at the lowest priced class, providing explicit
recognition that some milk loss is inevitable in farm-to-plant
movement. If, however, the loss exceeds the allowable level, the excess
shrinkage is priced at Class I. This ``shrinkage,'' as discussed above,
refers to milk losses associated with how the order classifies and
pools milk. Current shrinkage provisions are associated with pool
distributing plants that produce fluid milk products. In this context,
shrinkage provisions also provide fluid milk handlers the ability to
assign milk losses to a lower class use value within certain
parameters.
The loss allowances in the Class III and IV formulas are intended
to reflect actual losses that are beyond the processing handler's
ability to control. In addition, farm-to-plant losses cannot be
assigned to a lower class value since the milk solids unavailable for
processing effectively have no value in the Class III and IV formulas.
The price formulas in the recommended decision included typical
plant losses associated with the conversion of raw milk to the final
dairy product and relied on Federal order reform findings that the
value of Class III and IV milk would be determined from the NASS survey
prices collected on butter, cheese, dry whey, and nonfat dry milk.
Pricing formulas generally include both yield factors and make
allowances which together account for the entire conversion of raw milk
to a final dairy product. Comments received on the recommended decision
indicated that milk solid losses between the farm and the receiving
plant are real, unavoidable, and common.
Prior to Federal order reform, milk pricing for all Federal milk
marketing orders relied on the Grade B Minnesota-Wisconsin (M-W) price
series and later the Basic Formula Price (BFP). These prices were
determined by manufacture milk plant survey reports of Grade B milk
purchases free of government price regulation and represented a
competitive pay price for milk. The competitive pay price factored the
entire cost of processing milk purchased from farms into finished dairy
products. In contrast to the competitive pay prices, Federal order
reform could no longer rely on a competitive pay price and purposefully
chose NASS surveys of end-product prices and sales to establish Class
III and IV prices with product price formulas. Many of the plants
reporting to NASS purchase large quantities of milk from individual
producer cooperatives. The end-product pricing formulas developed under
reform were based in part upon the cost to process raw milk into
finished dairy products.
[[Page 67918]]
After reevaluation of the hearing testimony and comments, this
final decision reverses the recommended decision by including an
adjustment for farm-to-plant losses of butterfat and nonfat solids. It
is necessary to include such an adjustment in using end-product pricing
formulas for determining component prices. Since the handlers receiving
milk from producers pay the producers on the basis of farm weights and
tests, handlers do not receive all of the milk components due to farm-
to-plant losses. An adjustment to the price formulas to account for the
difference in milk components paid for versus components actually
received is appropriate. Based on the hearing record and comments filed
by numerous parties, the farm-to-plant adjustment will reflect a 0.25
percent loss of nonfat solids, including protein and other solids, and
a 0.25 percent loss of butterfat plus a 0.015 pounds loss of butterfat.
These adjustments are reasonable and are reflected in the respective
yield factors used for computing the milk component prices.
These loss allowances are adopted into the Class III and IV pricing
formulas. The farm-to-plant losses are reflected on the end-products
that result from Class III and IV milk, namely, cheese, dry whey,
nonfat dry milk, and butter. They are reflected in this way to ease the
concerns raised by Select Milk and Continental Dairy who indicated that
reflecting farm-to-plant losses on the front-end of the product
formulas (based on farm milk) may cause confusion.
A detailed description of the amendments to each of the respective
pricing formulas is provided below. This final decision incorporates an
adjustment to the respective yield coefficients of each milk component.
The adjustment is based on an overall factor of 0.25 percent loss of
each milk component and an additional 0.015 pounds of butterfat lost
between the farm and the receiving plant.
In-plant losses. Several handlers commented that in-plant losses
should be included in the formulas used for computing the component
prices. In this regard in-plant losses represent milk that cannot be
processed into dairy products due to the handling of milk by the plant.
This final decision does not include an adjustment for in-plant losses
because a manufacturing plant has control over the magnitude of in-
plant losses and therefore should not be compensated for such losses,
unlike the farm-to-plant loss which is outside the control of the plant
operator. This adjustment is reflected by recognizing that the cost of
converting 100 pounds of milk into a finished product is not
significantly affected by the quantity of finished product produced.
For example, if it costs $20 to convert 100 pounds of milk into 10
pounds of cheese assuming absolutely no losses, the make allowance
would be $2 per pound. However, if there is a loss of a half pound of
cheese prior to the final packaging of the cheese, only 9.5 pounds of
cheese is ``produced.'' In this example, the make allowance would be
$2.11 per pound of finished product. Thus the make allowance based on
pounds of product produced does account for at least a portion of in-
plant losses.
Ratemaking. In comments received to the recommended decision,
Kraft, joined by NDA, argued that including make allowances in the
pricing formulas was ``ratemaking.'' Kraft stated that the make
allowances formulated and used in the Class III and Class IV formulas
have not followed the standards needed to comply with ratemaking. Kraft
stated that the make allowances are not constitutionally valid because
they do not ensure that manufacturing costs provide for a reasonable
rate of return for manufacturers.
In seeking to characterize the provisions of make allowances in
Class III and Class IV pricing formulas as ratemaking, the commentors
are ignoring the unique and longstanding treatment of the milk pricing
provisions, including make allowances, in Federal milk marketing order
regulations. The make allowances in the Class III and Class IV pricing
formulas do not constitute ratemaking despite arguments that they do.
The make allowances adopted are used in establishing minimum prices for
milk under the authority and requirements of the Agricultural Marketing
Agreement Act and are different in kind from the ratemaking referred to
by the commentors.
Other issues. A comment filed by Lamers Dairy to the tentative
final decision argued that using make allowances to calculate Class III
and Class IV prices but not Class I and Class II prices constitutes
unequal treatment. The comment disregarded that make allowances in the
Class III and Class IV price calculations are used to determine prices
for milk used in those classes, and that the prices for milk used in
Classes I and II are based on those milk prices. The Class I and II
prices are determined for the purpose of valuing milk in uses that are
alternatives to manufacturing uses. Once the Class III and IV prices
have been established, the Class I and II prices can be calculated
using differentials from the base prices. No further comments on this
issue were received.
b. Class IV Butterfat and Nonfat Solids Prices
Butterfat Price. This final decision continues to use the NASS
price for Grade AA butter in calculating the butterfat price to be used
in Class IV, and uses the current and the recommended decision's make
allowance of $0.115. However, this final decision changes the use of a
0.82 divisor in the price formula to a multiplier of 1.20 in order to
provide consistency to price formulas and to account for farm-to-plant
milk losses.
The recommended decision continued to use the NASS price for Grade
AA butter for calculating the butterfat price to be used in Class IV,
and it continued to change the manufacturing allowance in the butterfat
formula by \1/10\ of a cent per pound of butter from the allowance used
under Federal order reform. The recommended decision also recommended
that the 0.82 divisor in the price formula be unchanged. The make
allowance change is the same as that included in the tentative final
decision, and neither it nor the other factors were affected by the
injunction. However, the injunction resulted in the same butterfat
price formula being used to value both Class III butterfat and Class IV
butterfat.
Several proposals were heard that would reduce butterfat prices,
either by reducing the butter price used in the computation of the
butterfat prices for all classes or by subtracting a fixed amount from
the butterfat price computed for Class IV. Proposals also were made
that would change the make allowance used in calculation of the
butterfat prices. There were no proposals to change the butterfat
divisor of 0.82, although one witness representing a western
cooperative association suggested that it be reconsidered as he felt it
did not include a shrinkage factor.
Product Price (Butter). This final decision continues to use the
NASS price for Grade AA butter in calculating the butterfat price to be
used in Class IV. Several witnesses for proprietary processor
proponents of the proposal to deduct six cents from the butter price
before computing the butterfat price stated that historically the value
of butterfat in the Federal milk orders has been based on the price of
Grade A butter. The witnesses explained that an equivalent price
determination had been issued in 1998 (when the CME discontinued
trading Grade A butter)
[[Page 67919]]
where nine cents would be subtracted from the Grade AA butter price for
use in calculating Federal order butterfat prices. This equivalent
price, according to the witnesses, was found to be ``essential'' to the
continued operation of the Federal milk order program. Further, they
argued that its adoption continued the policy of basing butterfat
pricing under the Federal milk orders on a value below that of Grade AA
butter.
The witnesses complained that under Federal order reform the
butterfat value is determined by using the NASS Grade AA price of
butter, which effectively increases the butterfat value under Federal
milk orders. According to proponents' calculations, the increase does
not amount to a full nine cents but is tempered by the use of the NASS
Grade AA price, which has averaged approximately three cents below the
CME Grade AA price, in the butterfat pricing formula. Therefore, they
stated, the actual increase in the butter price used to calculate
butterfat prices is approximately six cents. According to the
witnesses, subtraction of six cents from the NASS butter price would
return the relationship between the butterfat value under the orders
and the selling price of butter to the relationship that existed prior
to Federal order reform.
Several witnesses explained that when handlers must pay for
butterfat on the basis of the Grade AA butter market they cannot then
sell cream or finished products at a price that would allow them to
recover their costs. They testified that cream is sold at a price that
is termed a ``multiple'' of the butter price, and that the multiples
used when the butterfat price was calculated from the Grade A butter
price have not adjusted to the new pricing formula using Grade AA
butter.
The IDFA witness pointed out that the IDFA proposal to subtract six
cents from the NASS Grade AA butter price would apply not only to the
butterfat formula for Class II, Class III, and Class IV but would apply
to the advance butterfat formula used for computing the Class I
butterfat price. The witness testified that by applying the same
formula to all classes of butterfat, the current relationship between
the class prices would be maintained. The witness contended that there
is no justification for changing the relationships between the class
prices, particularly if the adjustment would widen the class price
spreads or, in effect, increase the Class I and Class II differentials.
Witnesses for NMPF and several large cooperative associations
testified in support of NMPF's proposal to reduce the calculated
butterfat price by six cents, with the reduction applied to Class IV
butterfat only. Under this proposal, the computation of the butterfat
prices for other classes would not contain the six-cent adjustment.
Several witnesses representing cooperative associations that process
butter explained that butter manufacturers incur additional costs when
procuring cream used for manufacturing butter as opposed to the cost of
converting producer milk to butter. The witnesses explained that these
additional costs include transportation, additional handling, and
additional pasteurization. The witness for LOL testified that the
additional costs amounted to 4.57 cents per pound of butterfat for
transportation and 0.4 cents per pound for receiving, storing, and
repasteurization. A witness for Agri-Mark stated that Agri-Mark's
transportation costs are slightly less than LOL's, probably due to the
proximity of the Agri-Mark plant to the sources of cream, but that the
other additional costs are slightly higher than the LOL costs, at 0.5
cents per pound of butterfat.
The proponents of reducing the Class IV butterfat value also
referred to the computation of the California Class 4a butterfat price,
which involves a subtraction of 4.5 cents per pound from the CME Grade
AA butter price to adjust for the costs of moving butter from the west
coast to the Midwest.
Those parties who favored reducing the butter price before using
the butterfat price formula to calculate any of the butterfat prices
disagreed vehemently with the proposal to reduce only the Class IV
butterfat price. They argued that such a reduction would distort the
relationship between the Class II and Class IV prices, resulting in a
greatly-increased price for Class II butterfat in relation to Class IV
butterfat. Specifically, the projected increase in the Class II-Class
IV butterfat price difference was cited as 6.7 cents per pound (from
the current difference of 0.7 cents). These parties argued that
butterfat values would most appropriately be reduced by the same degree
in all classes.
The price to be used for butterfat in Class III and Class IV should
be computed by subtracting a make allowance of 0.115 dollars per pound
from the monthly average NASS Grade AA butter price and dividing the
result by 0.82 since 1.2213 pounds of butter can be made from 1 pound
of butterfat. The Class II butterfat price should continue to be the
Class IV butterfat price plus 0.007 cents, while the Class I butterfat
price will be the advance butterfat price plus the applicable Class I
differential.
Contrary to the belief stated by some witnesses, the use of the
Grade AA butter price for computing the butterfat price under Federal
order reform was not an ``oversight.'' Trading of Grade A butter on the
CME ended June 26, 1998 (not by USDA, as implied in one brief, but by
the CME) because the volume of Grade A butter traded was not great
enough to warrant maintaining a trading venue. One brief argued that
the Grade A butter price represents a minimum price, and that there is
no need for concern that there will not be an available market for
Grade A and Grade B butter. However, with the end of trading in Grade A
butter on the CME, there is no published (or any other known) source
for obtaining a price for Grade A butter.
The use of the Grade AA butter price for establishing butterfat
prices is appropriate since that is the only grade of butter that has
significant enough trading volume to warrant a publicly-reported price.
Grade AA butter prices are the only butter prices regularly available
and represent the vast majority (about 95 percent) of the butter sold.
Although the ``multiples'' of the butter price apparently had not
adjusted to the use of the Grade AA price during the first 4 months of
experience under the revised orders and probably should not be expected
to adjust during the period in which this proceeding is under
consideration, the marketplace should, in time, make the needed
adjustments.
Various witnesses estimated that Grade A and Grade B butter
combined make up 3-7 percent of the butter in the U.S. Although a
witness noted that the Minnesota-Wisconsin (M-W) price for non-Grade A
milk continued to be surveyed even after the percentage of milk
eligible for the survey had fallen below a 5 percent level, it was
widely recognized for some time that a pricing alternative to the M-W
must be found because the M-W eventually would no longer provide a
representative price for a large volume of unregulated milk. Similarly,
with the decline of Grade A butter (and the unavailability of prices
for that product), the only alternative available for determining price
is Grade AA butter. A finding in the equivalent price determination
that a Grade A butter price was ``essential'' to continued operation of
the orders referred solely to the fact that the Grade A price was
specified in all of the orders at that time, not that the butterfat
value under Federal milk orders could never be based on any other
price.
Making an adjustment to a clearly valid price series to approximate
a price
[[Page 67920]]
series that has been discontinued for several years due to insufficient
volume for trading is inappropriate. Comments to the tentative final
decision from IDFA and Schreiber Foods continued to encourage the use
of an estimate of the discontinued Grade A price series for the current
formulas. Since it has been about four years since a publicly-traded
price for Grade A butter has been available, it is impossible to
determine what the current difference between these prices would be
because there are no reports of the Grade A price available. The vast
majority of butter made and sold in the U.S. is Grade AA, and that is
the appropriate product to which to base a value of butterfat used in
producing butter.
The 3-cent average difference between the CME and NASS butter
prices makes up \2/3\ of the 4.5-cent adjustment made by CDFA in
calculating the value of butterfat used in butter. An additional 6
cents deducted from the butterfat price calculated from the NASS price
would much more than make up the remaining 1.5-cent difference. Also,
the 4.5-cent CDFA adjustment is made for the purpose of reflecting the
cost of moving butter from California to Chicago. The butterfat price
calculated under the Federal order program is not intended to apply to
only one state. The NASS price is a nationwide survey and likely
includes a significant representation of California butter prices. If
there are additional costs involved in making butter, they would more
appropriately be included in the make allowance for butter.
Make Allowance (Butter). This final decision continues to use the
current and the recommended decision's make allowance of $0.115. The
make allowance factor in the butterfat price formula should be derived
from a combination of the manufacturing costs determined by CDFA and by
RBCS, as they were in the tentative final and recommended decision. The
CDFA cost data is divided into two groups representing high cost and
low cost butter plants, with the four plants in the high cost group
manufacturing, on average, about the same average number of pounds of
butter as the seven plants in the RBCS study. Use of the data for the
CDFA high-cost group of butter plants is more appropriate than use of
the weighted average cost for all of the California plants because it
is more likely that the high-cost plants, like the plants in the RBCS
survey, serve a predominately balancing function.
When the RBCS data is adjusted for packaging cost, general and
administrative costs, and return on investment with the CDFA data for
the high cost group, and with a marketing allowance of $0.0015 added to
both sets of data, the weighted average of the two data sets is $0.115.
This butter manufacturing allowance was very close to the Federal order
reform allowance of $0.114. As adopted in the tentative final decision,
the make allowance of $0.115 continues to represent the costs of making
butter in plants that serve a balancing function.
The increased costs of making butter, not including transportation,
cited by the proponents of reducing the butterfat price are expected to
be included in this manufacturing allowance, which exceeds the low cost
group in the CDFA survey by 3 cents per pound. The only class of use
for which adjustments for transportation have regularly been included
under Federal order regulation is Class I. Assuring that the order
provides an allowance for moving milk used in manufactured products
would interfere with provisions designed to assure an adequate supply
of milk for fluid use.
Comments to the recommended decision from IDFA again encouraged
lowering the Grade AA butter price by subtracting six cents from the
NASS Grade AA butter price before computing the Class III and Class IV
butterfat prices. IDFA added that if the Grade AA butter price was not
reduced then the make allowance should be increased by 4.5 cents.
For the same reasons as stated above in response to comments on the
tentative final decision and the recommended decision, this final
decision will continue to use the NASS Grade AA butter price to compute
the ClassIII and Class IV butterfat price.
Yield (Butter). As discussed above, this final decision provides an
allowance for butterfat lost in moving milk from the farm to the
processing plant. In response to the recommended decision, numerous
Class III and IV processors provided comments expressing concern that
the Class III and IV milk pricing formulas did not allow for general
and common losses associated with the assembly, transportation, and
delivery of milk and its components. The record supports concluding
that the Class III and IV butterfat losses from the farm-to-the plant
be computed as follows:
Class III & IV Fat Loss = (Fat Pounds x 0.0025) + 0.015
The loss allowance for butterfat will be reflected by adjusting the
0.82 divisor in the butterfat price formula. Testimony and comments
indicate that farm-to-plant losses on all milk solids is 0.25 percent
(0.0025) with butterfat incurring an additional loss of 0.015 per 100
pounds of milk. The butterfat price formula is determined as follows:
[sbull] For every pound of butterfat, 0.0025 pounds is lost in the
farm-to-plant transfer (1.000-0.0025 = 0.9975).
[sbull] In addition, for every pound of butterfat, there is an
additional 0.0150 farm-to-plant loss on butterfat solids (0.9975-0.0150
= 0.9825 pounds of butterfat).
[sbull] Dividing 0.9825 by 0.82 results in a butterfat factor of
1.20 (0.9825/0.82 = 1.20).
[sbull] Therefore, the Class III and IV butterfat value per pound
is computed as follows:
(NASS butter price -0.115) x 1.20
This final decision chooses to multiply the NASS butter price by
1.20 instead of dividing the NASS butter price by 0.82. This change in
the formula from division to multiplication is made to simplify and
provide consistency in the pricing formulas used for all milk
components and includes an allowance for farm-to-plant losses.
Although one witness suggested that the divisor in the butter price
formula that reflects the butterfat content of butter be reconsidered,
he did not indicate any number more appropriate than the 0.82 divisor
used in the current formula. There was no other testimony in the record
questioning the butter content factor. In fact, the only data in the
record applicable to the issue was a CDFA report on butter and powder
yields at California plants in 1996 that was included in an exhibit.
This report shows a 1.2213 weighted average butter yield (1 pound of
butterfat results in 1.2213 pounds of butter), which corresponds to the
use of the 0.82 divisor.
The record does not support adoption of a Class IV butterfat price
that is not reflected directly in the Class II butterfat price. There
was testimony from several witnesses that the current Class IV-Class II
price relationship is rational and appropriate, and an adjustment to
the Class IV butterfat price that is not reflected in the Class II
butterfat price would disrupt the current relationship. In addition, it
would seem reasonable that some of the extra costs claimed by butter
manufacturers, such as transportation costs for supplemental cream
supplies, butterfat standardization of outside cream sources, and
additional pasteurization would be as applicable for Class II
manufacturers of high-fat products using surplus cream as for butter
makers. Accordingly, reduction of the Class IV butterfat price only is
not considered appropriate.
[[Page 67921]]
This final decision modifies the Class III and IV butterfat price
formula as follows:
(NASS AA Butter Price -0.115) x 1.20
Class IV Nonfat Solids Price. This final decision maintains the use
of the NASS survey price reported for nonfat dry milk and maintains the
make allowance of 14 cents per pound of nonfat dry milk as indicated in
the previous decisions issued in this proceeding. This final decision
also changes the divisor from 1 to 0.99 in order to account for farm-
to-plant losses of nonfat solids and to simplify and provide
consistency to price formulas. Nonfat milk solids in buttermilk are
removed from the computation of the Class IV nonfat solids price.
The tentative final decision eliminated the 1.02 divisor in the
nonfat solids price formula to reflect the incorporation of dry
buttermilk (with a lower product price and higher make allowance).
Six proposals to change some part of the nonfat solids price
formula were considered at the hearing. Three of the proposals dealt
with the manufacturing allowance for nonfat dry milk (NFDM), with two
of the proposals advocating use of the RBCS survey results and one
proposal supporting an increase in the make allowance. The other three
proposals supported changes in the yield factor of the nonfat solids
price formula that would reflect greater powder yield from a pound of
nonfat solids. Two of the proposals to change yield factors included
using CME NFDM prices instead of the NASS survey. As discussed in the
recommended decision, the product prices used in the component pricing
formulas will continue to be obtained from the NASS survey.
Product Price (Nonfat dry milk). This final decision maintains the
use of the NASS survey price reported for nonfat dry milk. No proposals
were considered that would have changed the product price used in the
nonfat solids price formula, and the record contains no basis for
making any change in this formula factor.
Make Allowance (Nonfat dry milk). This final decision maintains the
make allowance of $0.140 per pound of nonfat dry milk as indicated in
the previous decisions issued in this proceeding. At the time the
hearing notice was issued, the most recent RBCS data were not
available, and those costs were not specified in the proposals. By the
time the hearing was held, however, the RBCS data had been released and
were included in the information introduced at the hearing. NMPF
supported continued use of a weighted average of the CDFA and the RBCS
manufacturing cost surveys, with inclusion of a marketing allowance and
the CDFA factor for return on investment. NMPF proposed that the NFDM
make allowance be $0.140 per pound.
Southeast Dairy Farmers Association also proposed that the RBCS
survey be used to determine a make allowance for NFDM, but did not
propose that a marketing allowance be included. The necessity of
including a marketing allowance was discussed in the recommended
decision.
Associated Milk Producers, Inc. (AMPI), proposed that the NFDM
manufacturing allowance be increased from $0.137 to $0.1563 per pound,
a rate based on AMPI's cost of making NFDM at its own three plants in
the Upper Midwest over a 5-year period. The AMPI witness stated that in
addition to a processing and packaging cost of $0.1254, the make
allowance should include a marketing allowance of $0.0024 and return on
investment of $0.026, for a total allowance of $0.1538 per pound,
modified from the level proposed in the hearing notice. The witness
testified that the three AMPI plants operate at approximately 80
percent of capacity.
No comments were filed that specifically addressed the adopted make
allowance for use in the nonfat solids price.
On the basis of the data and testimony included in the hearing
record, the manufacturing cost level that appears to be most
appropriate for use in the pricing formula for nonfat solids is $0.14
per pound. This value is calculated by using a weighted average of the
RBCS survey and the two less-cost California groups of plants, adding
the CDFA General and Administrative costs and Return on Investment
expenses for those two groups to the RBCS numbers, and adding a $0.0015
marketing allowance to both sets of data. The basis for using the two
lower-cost groups of California plants is that the mid-cost group is of
a similar average size as the group included in the RBCS survey, and
that the lowest-cost California group has a very similar total cost to
the mid-cost group. These three groups of plants (the RBCS plants and
the two California groups) are similar enough in size and cost to
consider as fairly representative, and should encompass those plants
that perform a market balancing function. The highest-cost California
group should not be included since its average cost is more than ten
cents per pound of NFDM above the RBCS group or either of the other two
California groups.
The AMPI cost numbers cannot be included in the weighted average
since the number of pounds of NFDM associated with those costs is not
available. When the AMPI marketing allowance and return on investment
estimates are replaced with the more moderate numbers used in the make
allowance calculation, the AMPI manufacturing costs do not differ much
from the other two sources. This is true despite the wide discrepancy
in the capacity utilization percentage estimates for the two data sets
(80 percent for the AMPI plants versus less than 50 percent for the
plants in the RBCS survey). Inclusion of the AMPI costs in the RBCS
survey would have included a larger representation of NFDM manufactured
outside California. However, the record indicates that a high
percentage of the NFDM manufactured in the U.S. comes from California
and the proportion of cost data representing California in the
manufacturing allowance is reasonable.
``Yield'' (Nonfat solids). This final decision adopts changes to
the Class IV nonfat solids formula in order to account for farm-to-
plant losses, more accurately reflect the value of the nonfat milk
solids in nonfat dry milk and buttermilk powder, and provide
simplification and consistency to the milk price formulas.
The tentative and recommended decisions included buttermilk solids
in the value of nonfat milk solids. However, a reevaluation of the
Class IV nonfat solids pricing formula finds that recognizing a minimum
value for buttermilk powder does not materially affect the Class IV
skim milk price. Record evidence indicates that the price of buttermilk
powder can be a low of 70 percent of the nonfat dry milk price for the
same period. In addition, according to the record, the make allowance
of buttermilk powder is an additional 2 cents per pound higher than the
nonfat dry milk make allowance. Official notice of weekly Dairy Product
Prices published by the National Agricultural Statistics Service for
January 2000 through May 2002 is hereby taken. Copies of Dairy Product
Prices can be located at the Web site: http://
www.usda.mannlib.cornell.edu/reports/nassr/price/dairy/.
Using the 2-cent higher make allowance for buttermilk and prices
for nonfat dry milk and buttermilk powder for the period of January
2000 through May 2002 it was determined that the effect of including
buttermilk powder in the nonfat solids price and the Class IV skim milk
price was negligible. Therefore, this decision eliminates the
[[Page 67922]]
consideration of nonfat solids that end up in buttermilk powder from
the Class IV nonfat solids pricing formula.
According to the Economic Research Services publication Weights,
Measures, and Conversion Factors for Agricultural Commodities and Their
Products, nonfat milk solids in dry buttermilk are 0.0479 pounds per
pound of nonfat milk solids and are calculated as follows:
[sbull] For every pound of dry buttermilk there are 0.919 pounds of
nonfat milk solids.
[sbull] Assuming a dry buttermilk yield of 0.0521, the nonfat milk
solids that end up in dry buttermilk are 0.0479 pounds per pound of
nonfat dry milk solids (0.919 x 0.0521 = 0.0479).
The Class IV nonfat milk solids price can therefore be calculated
as follows:
[sbull] For every pound of nonfat milk solids (nfms), 0.0025 pounds
is lost in the farm-to-plant transfer.
[sbull] One pound of nfms minus the farm-to-plant loss of 0.0025
equals 0.9975 pounds of nfms at the plant.
[sbull] For every pound of nfms, 0.0479 pounds of these solids end
up in dry buttermilk powder.
[sbull] 0.9975 pounds of nfms minus the 0.0479 pounds of solids in
dry buttermilk equals 0.9496 pounds of nfms in the form of nonfat dry
milk.
[sbull] Since each pound of nonfat dry milk contains 96.2 percent
nfms (3.8 percent moisture) then, 0.9496/0.962 = 0.9871 (rounded to
0.99)
Therefore, the Class IV nonfat milk solids price per pound is
computed as follows:
(NASS nonfat dry milk price--0.14) x 0.99
A considerable portion of the testimony dealing with the nonfat
solids pricing formula pertained to the 1.02 divisor. The divisor is
not strictly a yield factor but is intended to reflect the amount of
nonfat solids in NFDM, with an adjustment for the small amount of
buttermilk powder that is made in conjunction with the manufacture of
butter and NFDM. Testimony by a number of witnesses asserted that the
product price minus the make allowance should be either multiplied by a
number greater than 1 (such as 1.02) or divided by a number smaller
than 1 (such as 0.99 or 0.975) to reflect the fact that more than 1
pound of NFDM can be expected to be manufactured from 1 pound of nonfat
solids due to the moisture content of NFDM.
Many of the hearing participants supported the 1.02 divisor,
adopted under Federal order reform, and expressed understanding of the
approach of adjusting the ``yield'' of NFDM to compensate for the fact
that some of the powdered product made from Class IV milk is buttermilk
powder (BMP). Although 1.03 to 1.05 pounds of NFDM generally can be
obtained per pound of nonfat solids, the formula also recognizes a
lower value and higher manufacturing cost for BMP.
Several witnesses correctly assessed an alternate solution to the
dilemma of calculating a component price from two commodities with
different prices and different make allowances as one requiring
addition of dry buttermilk as another component price in the Federal
milk order pricing system. As described by at least one witness, such
an undertaking would require adding dry buttermilk to the NASS price
survey, determining a separate make allowance, and calculating a yield
factor. This procedure would be a burdensome undertaking for very
little benefit, since dry buttermilk represents only about 5 percent of
the dry products resulting from the manufacture of butter and nonfat
dry milk. The issue that remains is how best to reflect the value of
nonfat solids used in both NFDM and BMP in the same component pricing
formula.
The IDFA witness testified that for the 19-month period beginning
with September 1998, the Central States' dry buttermilk price had
averaged $0.798 per pound, while the Central States' ``mostly'' price
for NFDM averaged $1.043. The LOL witness similarly testified that the
1999 Northeast ``mostly'' price for NFDM averaged $1.0389, while the
BMP price was $0.7686 per pound. On the basis of these numbers, it
would appear that the price of BMP is roughly 75 percent that of NFDM.
However, comparison of BMP and NFDM prices for the years of 1996
through 1999 and into 2000 reflects a more complex relationship between
these prices than the hearing testimony would indicate. The BMP price
as a percentage of the nonfat dry milk price (using Western prices) was
100.9 percent in 1996, 94.5 percent in 1997, 88 percent in 1998, and 71
percent in 1999. During the first third of 2000, BMP prices generally
averaged less than 70 percent of NFDM prices. As the year 2000
progressed, however, the percentage increased, being at levels up to
100 percent in late July and remaining above 85 percent for the second
half of the year in all areas.
The witness representing Agri-Mark stated that Agri-Mark employees
engaged in manufacturing operations had estimated that the costs of
producing BMP range from 1 to 3 cents more per pound than those of
producing NFDM. Given that the manufacturing costs estimated by the
Agri-Mark witness for other products were somewhat higher than those
supported by the bulk of the hearing record, it is reasonable to
consider the extra cost of manufacturing BMP to be generally not more
than 2 cents in excess of the cost of manufacturing NFDM. In addition,
it is difficult to justify increasing the powder make allowance for all
of the powdered product represented in the make allowance since the
RBCS witness testified that manufacturing costs of BMP manufactured at
the plants included in the RBCS survey are included in the powder costs
reported by RBCS.
Testimony regarding actual yields of NFDM and BMP were provided by
only one witness representing a manufacturing plant operator. The
numbers provided, while not complete enough for an exact accounting of
the ultimate disposition of the plant's receipts of producer milk,
indicate strongly that the approximate loss of nonfat solids used in
the manufacture of NFDM at the specific plant was 3 percent, with 16
percent lost in the manufacture of BMP, for a combined weighted average
loss of more than 3.5 percent of nonfat solids. In comparison, data
published by the State of California showed a weighted average loss of
solids not fat of 2.13 percent in the manufacture of butter and
powdered products.
The California data indicate a weighted average powder yield of
1.0252 pounds of NFDM and BMP from 1 pound of nonfat solids. One
witness discounted this data by observing that the ``high'' California
yield was reported as 1.0406, which would represent a higher-than-
allowable moisture content. This number may be influenced by the
``high'' reported BMP yield of 0.0749.
As noted above, the general impression conveyed by testimony in the
hearing record, that BMP is worth considerably less than NFDM and that
the cost of processing it is significantly greater than that of
processing NFDM, is misleading. The average BMP price over the period
1996-July 2000 is approximately 87 percent of the NFDM price, and the
cost of manufacturing BMP is, on the basis of the information
available, no more than 2 or 3 cents in excess of the $0.14 recommended
as the NFDM make allowance.
The following information from the hearing record was used to
determine a multiplier or divisor for the total nonfat solids pricing
formula that would result in a minimum price for nonfat solids while
incorporating the data and testimony in the record about the
manufacture of NFDM and BMP. To assure that the result represents a
[[Page 67923]]
minimum price, the low or high areas of ranges of numbers related to
the manufacture of these two products were used. The CDFA report on
butter and powder yield in California plants in 1996 was used in making
some of the calculations regarding